Oil Economics 101

With the nation’s economic anxieties growing in direct proportion to oil prices, let’s not forget this fact: that the Left’s decades-long refusal to address domestic energy supply will cost Americans more than the soaring gas prices they are already paying.  

Who is to blame for increasing gas prices?  Listening to the rhetoric on the Left, it’s the fault of George Bush, or, better yet, Dick Cheney, who must be making some money on the side.  (Is it part of a Halliburton plot?)  Moving rightward, a surprising number of conservatives seem to be buying into the notion that soaring oil prices are a conspiracy hatched in the boardrooms of corporate America.

Unfortunately for the conspiracy theorists, the exotic theories do not hold up.  Instead, rising prices are the result of that most fundamental of economic principles:  supply and demand.  Demand for oil is booming around the world as developing nations grow economically and develop their own middle-classes.

Consider the world’s two most populous nations, China and India, which together contain over one third of the world’s population and seven times that of the world’s third largest country, the United States.  Both China and India are experiencing annual economic growth rates approaching 10 percent.  As these folks earn more, they want what we want – cars, air conditioning, TVs, better food, etc.

We cannot freeze economic conditions around the world. As demand for oil increases, supplies get tighter and costs go up. That’s Economics 101. A recent Canadian study predicted that oil prices could double by 2012 due to the growing supply and demand imbalance. The report also states, “An expected drop in demand in the United States due to higher prices and a weak economy will be more than offset by demand growth in developing nations.”  

Then there’s the supply side of the equation.  This week’s spike in prices had little to do with any of the popular explanations. Recently, Islamic radicals in Nigeria attacked and blew-up multiple oil pipelines run by Shell Oil. At the same time, employees of Exxon in Nigeria were striking for more pay. Nigeria is Africa’s most prolific oil producer and an important source of world oil supplies.

But that isn’t all. Rumors were rampant last weekend that the Defense Department is drawing up plans to hit terrorist camps in Iran, where radicals are being trained and sent to Iraq to kill American soldiers. We have tolerated this for months, and patience is wearing thin. Any hostilities in Iran raise the possibility of an interruption in oil supplies from that country.  A Strike on Iran could cause that nation’s unstable leader to blockade the Strait of Hormuz, through which 30 percent of the world’s oil passes.

So, if you’re a foreign government that needs oil for your military, or an airline company or anyone else who relies on oil, this week brought anxiety about whether your supply will be disrupted. To “hedge,” you go into the market place and buy contracts guaranteeing you delivery of oil at a future date. But because many people had the same need this week, prices were driven up (supply and demand).

Supply-side action can be taken. President Bush remarked in a speech this week that, “Members of Congress have been vocal about foreign governments increasing their oil production; yet Congress has been just as vocal in opposition to efforts to expand our production here at home.”

Bush went on to explain:

“They repeatedly blocked environmentally safe exploration in ANWR. The Department of Energy estimates that ANWR could allow America to produce about a million additional barrels of oil every day, which translates to about 27 millions of gallons of gasoline and diesel every day. That would be about a 20-percent increase of oil — crude oil production over U.S. levels, and it would likely mean lower gas prices. And yet such efforts to explore in ANWR have been consistently blocked.”

As the president also noted, it’s been more than 30 years since America built its last new oil refinery during which time Congress has repeatedly blocked efforts to expand capacity and build more refineries.

But liberal politicians believe the solution lies in punishing the producers of the very products we need most.  Barack Obama has suggested imposing a “windfall profits” tax on the oil companies. We tried high taxes and price controls back in the 1970s, and that scheme led to decreased domestic oil production and increased oil imports from OPEC nations, shortages and long lines at the pumps.  

What’s the real solution?  Recently, U.N. Secretary General Ban Ki-Moon responded to the global food crisis by warning that the world “must urgently increase food production to ease skyrocketing prices…” That solution would be more aptly applied to our growing energy challenges. We must increase production of oil and natural gas in order to meet the increasing demand worldwide

In order to do that, Senate conservatives have introduced a common-sense, free market-oriented plan – the American Energy Production Act of 2008. The bill would allow for more domestic oil and natural gas exploration, more use of coal and liquefied coal and it would tap into America’s vast oil shale fields. The result of such a plan, if enacted, would be more oil and natural gas on the market, easing supply constraints and lowering prices. It would also create tens of thousands of new jobs in America and go a long way toward reducing our dependence on energy from unstable and hostile foreign regimes, many of which are actively seeking our destruction.  

The plan makes sense, which is probably why congressional liberals have already come out against it.